US stock market daily report (June 26, 2014, Thursday)

Securities fraud lawsuit has been filed on Thursday by New York Attorney General Eric Schneiderman, against Barclays British bank - who could face litigation cost of $163 million. Schneiderman is charging Barclays with 'dark pool' fraud for giving an unfair edge to high-frequency traders in the United States, while claiming to be protecting other clients from them. The lawsuit alleges that Barclays promised to get the best possible prices for customers looking to buy or sell shares but instead, took action to maximize the bank's profits and executed nearly all of its customers' stock orders on LX instead of exchanges or other venues that might have offered better prices.

Barclays reportedly told their dark pool clients that they would be protected from predatory high-frequency traders who use high speed trading advantage to deprive other investors of smaller profits on every trade, per NY AG. The truth is that these same dark pool clients had no protection. Barclays in fact were charging the same high-frequency traders literally nothing. Schneiderman said, "Barclays grew its dark pool by telling investors they were diving into safe waters. Barclays dark pool was full of predators - there at Barclays invitation."

High Frequency Trading [HFT] accounts for nearly 50% of all U.S. trading volume. The complaint read that Barclays 'wooed' high-frequency traders by disclosing detailed, sensitive information about other customers to the firms - to help ensure their aggressive trading strategies were effective and by charging those high-frequency traders nearly nothing.
Also read in the complaint - Barclays told clients they do not favor its own dark pool when routing client orders to trading venues - in reality - the bank was doing just that.
Barclays dark pool activities were far from the best interest of the banks clients, per comments in the complaint made by a former director. Per reports, better trading opportunities may have been missed elsewhere, as told by a former Baclays employee - based on the high amount of client orders Barclays was sending to its own dark pool.

Schneidermans' complaint against Barclays is based on internal communications provided by former Barclays employees. The communications say that, while Barclays told dark pool clients that the bank would keep high-frequency traders that engage in predatory trading practices out of its dark pool, they never prevented any trader from participating. Barclays allegedly falsified marketing material which showed the extent and type of high-frequency traders in its dark pool by not including high-frequency trading firm Tradebot Systems. The bank had already identified Tradebot as having engaged in aggressive trading behavior. Tradebot had already been designated as the largest participant in Barclay dark pool, at the same time.

Antony Jenkins, Chief Executive Officer for Barclays, has said the banks culture, criticism received for high-risk high-reward had to change and that the banks systems and controls are improving. Barclays said in an emailed statement, "We take these allegations very seriously." The bank added that they are cooperating with authorities, are looking into the matter internally and that the integrity of markets remains a top priority for Barclays. The action filed against Barclays is the highest profile case yet to emerge in the U.S. from authorities' efforts to ensure that dealers and banks are not ripping off investors in an increasingly automated market. In August 2012, Jenkins took over the reigns as CEO for Barclays after Bob Diamond was ousted after the bank was fined for alleged manipulation of Libor benchmark interest rates. While pushing for a change in culture, Jenkins is working toward improving profitability by costs cutting which includes axing nearly a quarter of worker in the investment bank sector.

Attorney General Schneiderman is looking into dark pools - typically owned by brokers and all big banks - where traders remain anonymous with trading information hidden until after all trades are completed, on the specific stock.

Dark pools were originally designed to allow investors to execute large order trades without tipping off the market as to their investing action. Outsiders are noting that the opacity of the markets may be resulting in more and more investors getting ripped off, due to the larger volumes of trades moving into dark pools.